Clarification provided on a number of points in relation to the Part A1 Moratorium

The Corbin & King group operates a number of restaurants, including the Wolseley and the Delaunay.  

The group's parent company ("Topco") had been provided with working capital by the secured creditor, an associate company of Topco's majority shareholder. A number of group companies (the "Operating Companies") each guaranteed repayment of the Debt. Topco had not repaid the facility upon its maturity. The secured creditor demanded payment by Topco of c.£34m (the "Debt") in January 2022.

An offer was received from a third party investment fund ("Knighthead") for the acquisition of debt and equity in Topco for a sum equal to the total amount of the Debt. This initial offer by Knighthead was rejected.  

Moratoria were considered necessary to protect the Operating Companies given their exposure pursuant to the guarantees they had each granted in respect of the Debt.

The Operating Companies were otherwise able to pay their ordinary trading debts as they fell due. The Moratoria would allow for a solvent restructuring of the group finances and ensure that the Operating Companies avoided administration. Benji Dymant and Rob Harding of Teneo Financial Advisory were appointed as joint monitors of the Operating Companies on 20 January 2022. In accordance with Part A1, the monitors provided a statement that, in their view, it was likely that the proposed Moratoria would result in the rescue of the companies as going concerns.

One of the perceived limitations preventing the wider use of the Moratorium provisions has been the carve out of certain types of debts from the payment holiday provisions. Generally, debts that have fallen due before the Moratorium, or that fall due during the Moratorium, are subject to the payment holiday during the Moratorium. However, there are several crucial carve outs, including but not limited to:

• amounts in respect of goods or services supplied during the Moratorium;
  
  
• amounts in respect of rent for the period during the Moratorium; and
  
  
• debts or other liabilities arising under a contract or other instrument involving financial services,

together the "Excluded Debts". 

The monitors of a Moratorium are required to monitor the ability of the company to pay its Excluded Debts.  If, at any time during the Moratorium, the monitor considers that the company is unable to pay such debts, or that the company is unlikely to be rescued as a going concern, they have a duty to terminate the Moratorium.

The secured creditor demanded payment of the Debt pursuant to the guarantees and each of the Operating Companies fell liable to pay the Debt.

Administrators were appointed in respect of Topco on 25 January 2022. The joint administrators received a further offer from Knighthead for the acquisition of Topco's direct and indirect interests in the Operating Companies for consideration at least equal to the Debt plus any accrued and unpaid interest. Knighthead indicated that they were prepared to work to a tight timetable in order to complete the sale. However, in line with their statutory duties, the joint administrators were under an obligation to achieve the best price reasonably obtainable in the circumstances and were required to run a full marketing process prior to completing any sale.

On 28 January 2022, the secured creditor applied to court to have the Moratoria terminated. They argued that the Operating Companies no longer met the key criteria for the Moratoria, namely: that the Debt was an Excluded Debt; that the Debt was due and payable by the Operating Companies; that the monitors should have concluded that the Operating Companies could not pay that Debt and should, therefore, have brought the Moratoria to an end; and that their failure to do so in those circumstances had unfairly harmed their interests.

Was the Debt excluded from the payment holiday granted by the Moratoria?

It was agreed between the parties that the Debt would ordinarily fall within the payment holiday afforded by the Moratoria, given that it was a debt to which the Operating Companies became subject during the Moratoria by reason of an obligation incurred under the guarantee before the Moratoria came into force.  However, as the guarantees related to lending by the secured creditor to Topco, they were deemed contracts involving financial services. The judge therefore determined that the Debt was an Excluded Debt and not subject to the payment holiday. The judge noted that this exclusion was surprising, but clear upon interpretation of the statute.

When does the duty to terminate a Moratorium arise?

The duty to terminate a Moratorium arises once the monitor “thinks that the company is unable to pay” such a debt.  Adopting previous caselaw in relation to the conduct of administrators, the Court held that the legislation's use of “thinks” rather than, for example, “reasonably believes”, is a clear indication that Parliament intended a degree of latitude to be afforded to administrators and, by extension, to monitors. A decision will only be open to challenge where it was made in bad faith or clearly perverse in the sense that no reasonable monitor could have reached it.

Was there an immediate prospect of the Debt being paid?

As noted above, Monitors should assess whether the company is able to pay its Excluded Debts. The legislation expressly allows the monitor to disregard debts that the monitor has reasonable grounds for thinking are likely to be paid or compounded to the satisfaction of the creditor within 5 business days.  However, it was agreed between the parties that the Debt could not be satisfied within that timeframe.  Notwithstanding this, the judge was not persuaded that 5 Business Days was an absolute cut off, but noted that anything over 5 business days requires specific assessment.  The judge noted that the question for the monitors was whether there was an immediate prospect of the Operating Companies receiving third party funds to repay the Debts, or whether there were any other assets capable of immediate realisation. Immediate realisation was deemed to be a matter of commercial judgment for the monitor. 

Were the monitors correct to resist termination of the moratoria?

The initial Knighthead offer made to the joint administrators of Topco was, at that time, not certain enough to mean that there was an immediate prospect of the Opcos being relieved of their guarantee liabilities. The judge determined that the decision of the monitors to allow the Moratoria to continue at that stage "fell on the wrong side of the line". It was clear that the administrators of Topco would not have reasonably been able to accept that offer without first running a wider marketing process. Any potential for repayment of the Debt was not, at that stage, imminent.

However, Knighthead made a further offer to the joint administrators which included the provision of interim funding to allow for the Debt to be refinanced on a short-term basis in order to provide stability for the completion of an orderly sale process. This later offer was deemed to have properly caused the monitors to conclude that there was a prospect that Topco would immediately receive funds to allow the Debt to be repaid and that the guaranteed liabilities would fall away. Indeed, following the hearing, Knighthead actually tendered those funds to the secured creditor in repayment of the Debt.

Whilst the Moratorium remains largely untested, it can offer viable businesses the protection needed to facilitate a solvent restructuring. This case provides judicial clarification on a number of points in relation to the Moratorium, including:

1. That debts or liabilities arising in connection with lending activities will be Excluded Debts and not subject to the Moratorium. This will be welcome clarification for those in the business of lending, but it is an obvious limitation to the usefulness of a Moratorium to many companies.
   
   
2. That monitors are to be held to a similar standard as insolvency practitioners holding other types of offices. As such, the Court will not second guess their decision making, and will only challenge their decision making if it was made in bad faith or was clearly perverse in the sense that no reasonable insolvency practitioner would have reached the same decision.
   
   
3. That monitors should consider all of the circumstances as a whole when considering whether Excluded Debts would be satisfied, including, for instance, another party liable for the relevant debt satisfying the relevant obligation.
   
   
4. Whilst the monitor can disregard Excluded Debts that can be repaid within 5 business days, this does not, of itself, require the monitor to terminate the Moratorium if the relevant debt cannot be satisfied in this timeframe. Instead, the monitor is required to make specific assessment in relation to those debts and to consider whether the company or any other party responsible for the relevant liability has the immediate prospect of receiving third party funds or owns assets capable of immediate realisation to satisfy the relevant debt.  The monitor is permitted to take into account all of the circumstances so as not to lead to an unduly restrictive interpretation that would diminish the usefulness of the Moratorium.